Common Sales Tax Pitfalls – And How to Avoid Them

The Great Recession and slow recovery have taken a toll on state and local government revenues. Many states and municipalities have cut services and operations in response, but they’ve also significantly ramped up tax enforcement activities in an effort to secure more revenue, relying heavily on simple technology tools to automate and expedite enforcement processes.

While governments are putting technology to work for tax enforcement purposes, many small businesses have been slower to follow suit on the tax compliance side, living under the false premise that compliance technology is expensive, difficult to use, and relegated only to those large enterprises that have armies of technical and accounting staff who master the expertise to use these tools. This misperception leaves them vulnerable and at a significant disadvantage. It’s not that business leaders don’t want to leverage the best technology tools to ensure compliance: Often it’s a case of small business leaders not realizing the scope of their obligations and the many pitfalls associated with compliance, even for company leaders who have the best of intentions, and more important, that modern technologies are readily available to businesses of all sides, that are not difficult to implement and not expensive to use.

Unlike the hoopla surrounding the annual income tax filing deadline, sales tax deadlines happen each month without any hype. Business owners who are focused on the bottom line – particularly those who are engaged in startup activities – can easily forget about this obligation. But noncompliance can be extraordinarily costly. Here are some of ways business owners get into trouble through noncompliance:

• Missing deadlines: Businesses that miss sales tax filing deadlines – even by just a couple of days – can be liable for hundreds of dollars in fines, even on minor tax obligations. It’s surprisingly easy to lose track of important dates when sales taxes are completed manually, especially for smaller companies where the owner is wearing multiple hats to keep the operation going.

• Miscalculations: A sales tax miscalculation can have devastating consequences. One retailer was hit with a class action suit after setting up a cash register to calculate sales tax based on a location that was just a few blocks away – but in a separate sales tax jurisdiction (different county) with a lower tax rate. The retailer was liable for the difference out of pocket since it was too late to collect from customers, as well as the fines and penalties associated with the under-reporting.

• Special tax categories: Other businesses have run into trouble through lack of awareness of which products and services are subject to special sales taxes. For example, in some jurisdictions, separate sales taxes apply to soft drinks, restaurant revenues and alcoholic beverages. A business that fails to comply could be subject to heavy fines and penalties.

• Changing tax regulations: Even business leaders who try diligently to meet their sales tax obligations may find themselves out of compliance due to changing regulations. Sales taxes are subject to frequent adjustment for a variety of reasons, and businesses – especially those with multiple locations – must keep up-to-date or risk noncompliance and the resulting penalties.

These are just a few of the ways business leaders can run afoul of state or local sales tax compliance. It’s a complex issue, and there are thousands of tax jurisdictions, so it’s easy to make mistakes. But even companies that haven’t made any mistake can find themselves adversely impacted: Since taxing authorities have automated many processes, merchants occasionally receive incorrect assessments. For example, in many situations, the state systems that generate assessments are out of synch with the systems that register when a return was filed or payment received. Very often, as the state determined cut-off date (typically 5 – 7 days after the filing due date) passes, an assessment will be issued automatically because the return or payment were not listed as being received. Without doing anything wrong, the business owner must now spend countless hours in negotiating with the state and local agencies and prove their innocence that they filed the returns in a timely manner and payment was collected in full.

While the business may not have to pay a penalty in the end if they can prove the assessment is incorrect, they will have to commit time and resources to documenting compliance and making their case to the appropriate section of the bureaucracy. This is time better spent on managing your business and generating profits.

So what’s the solution? Savvy small business leaders are increasingly taking advantage of technology to ensure sales tax compliance. Over the past several years, sales tax compliance technology has evolved, becoming much more affordable, accurate and automated.

With the right outsourcing partner, businesses can benefit from the automated solutions now on the market to ensure they file state taxes accurately and on time – and have an outsourcing partner to back them up if they get an improper assessment. In this way, businesses can avoid the common pitfalls in sales tax compliance – and focus on taking care of business.

About Jonathan Barsade, Exactor CEO

Jonathan Barsade is founder and CEO of Exactor, Inc., a leading developer of end-to-end solutions for secure sales tax record keeping and compliance. He can be reached at jbarsade@'exactor.com or online at Exactor.com.